Taxes 'higher under Labour'

by BBC News Online's Steve Schifferes

The tax burden has risen during the four years that Labour has been in power, according to a new report by the independent Institute for Fiscal Studies (IFS).

The total tax revenue received by the government this year amounted to 40.5% of the size of the total economy, compared with 37.6% in l996-97 at the end of the last Conservative government - an increase of some £24.3bn in real terms.

The news will give ammunition to Conservative leader William Hague who has indicated that he intends to make taxation one of the key battlegrounds of the general election campaign.

Overall, the figures show that under the Labour government, taxes rose by 4.8% per year, while public spending only increased by 1.3% per year - compared with an increase of 2% in both figures under the last Conservative government of John Major.

However, the IFS says that Labour can meet its ambitious plans to increase public spending over the next three years without any further tax increases - although in later years more spending would require higher taxes or more borrowing.

In the first full day of campaigning for the general election, economic issues have been at the centre of the debate as Chancellor Gordon Brown has indicated that if Labour is elected for a second term it will aim for "prosperity for all."

And he said that the tough decisions taken to cut public borrowing were the foundations of any future spending programme.

Tax take higher, tax rates lower

But significantly, he refused to pledge - so far - that Labour would keep taxes unchanged.

According to the IFS, Labour's claim that the direct tax burden on a typical family with two children has fallen to its lowest level since l972 is "not useful", since it fails to take account of the effect of indirect taxes, and since it is difficult to work out who is a "typical family."

Labour has also said that taxes are now lower as a percentage of GDP, when compared with Conservatives plans for the same period.

But the IFS says that because of changes in how GDP is measured, that comparison is misleading.

However, the research institute does point out that most of the tax increases under Labour have been due to a higher tax take, rather than higher tax rates.

The booming economy has led to increased income tax and national insurance receipts, which have gone up by more than 2% of GDP.

And tax cuts in the pipeline, including the child tax credit, mean that the tax burden is projected to fall next year to 40.1%.

Everyone better off?

In its defence, Labour can point to the fact that most of the tax increases it implemented were the excise tax increases already planned by the Conservatives.

New measures first introduced by Labour in government actually amounted to only £1.6bn, while the total Budget changes during this Parliament increased taxes by £5.7bn.

And Labour can point to genuine redistribution, with most of the tax changes benefiting those at the bottom of the income distribution.

The IFS calculates that the poorest 10% of the population has gained 11.9%, compared to a gain of just 0.2% for the richest 10% of households.

But that calculation only includes direct taxes, which make up only half of the total tax changes - other changes are much harder to allocate to individuals.

Business taxes higher

That would apply, for example, to business taxes, which have also gone up under Labour, according to the IFS.

Although the government has cut the rate of corporation tax from 33% to 30%, and given extra benefits to small and medium enterprises, it announced two big tax hikes for companies just after coming to power.

According to the researchers, the abolition of Advance Corporation Tax (ACT) and the reform of the dividend tax credit for pension funds, cost the business sector £2bn and £5bn respectively in 2000-01 - more than offsetting the £3bn saved in corporation tax.

But it points out that in the next Parliament the benefits to the government of ACT reform - which meant companies were paying extra tax up to 2003 - will disappear, forcing the government to find a replacement for that revenue stream.

The shortfall from business taxation will add to the pressure for tax increases after 2004, if Labour is returned to power and wants to continue increasing spending on public services at the current rate.